David Root
Head of Client Engagement
FFI Solutions
Nearly seven years on from the historic Paris Climate Accords, COP27 made clear that these annual meetings convened by intergovernmental organizations appear unlikely to play a significant role in limiting global temperature rise to below 1.5°C.
To be fair, the conference in Egypt built consensus on some key issues – the landmark deal on a loss and damage fund for poorer countries, to name one. But with those victories, which have drawbacks of their own, came costs – the weakening of requirements around countries setting new and more ambitious climate commitments, a lukewarm renewed commitment to the 1.5°C target, and no mention of phasing out all fossil fuels. Countries, particularly high emitters, appear unwilling to take meaningful collective action in furtherance of the Paris Agreement.
It is unrealistic to rely on the annual COP to produce enforceable global policies that will move the needle on emissions. It is critical for capital allocators and corporations to fill this void and demonstrate that emissions reduction, economic prosperity, and equity can not only co-exist but also should become accepted financial and operating practice. Our window of opportunity is closing.
For years fossil fuel companies have stymied climate action. The industry was out in force at COP27, much to the ire of climate activists. At 600+ strong, individuals representing the interests of oil and gas companies and petrostates successfully positioned gas as a “bridge fuel,” and no doubt contributed to the preservation of the status quo. As the world remains “on the brink of climate catastrophe,” devoid of international leadership, the role of fossil fuel companies, and those that fund their continued development of hydrocarbons, becomes even more important, in our view.
Some fossil fuel companies are beginning to appreciate the risks, and opportunities, of the energy transition. A few are even acknowledging their unique responsibility, to some extent, and expressing climate ambitions through emissions reduction targets and net zero commitments. What remains to be seen, and what we should all scrutinize, is whether these companies’ implementation plans are credible and whether actions taken (and yet to be taken) are (or will be) aligned with a 1.5C target. It becomes incumbent upon investors to make these assessments and to act accordingly – fund, divest or engage.
As we saw last year, shareholder activism can effectively target fossil fuel companies for climate inaction, double-speak, and unambitious transition plans. But while fossil fuel expansion needs to be curtailed, investors cannot simply focus their attention on the supply side to achieve emissions reduction. Achieving net zero requires that capital allocators view all investments and lending activities through the lens of climate change.
Our takeaway from COP27: with international (and national) institutions in disarray, a stakeholder-centric financial system seems our last best hope to avert climate catastrophe.